Does the Index Tend to Top Tick Their Buys?

When AMD missed earnings earlier this week, the stock had a bad day losing nearly a quarter of its value. (Don’t cry for shareholders as they are still up five fold from the 2016 lows.) But there was some chuckling going on toward the largest buyer of stocks in the market, the S&P 500 Index Fund, which just recently added the stock to its portfolio on March 20th. So while the Index missed the big move in the stock for the previous year, it unfortunately did catch this week’s sharp decline. That got some in the market thinking, do the indexes tend to be top tick buyers? Given the cap weighted nature of many indexes, do they tend to buy stocks after a big increase in market cap?

I was curious, so I pulled the data on the additions to the S&P 500 index for this decade and took a look. After scrubbing the data for spin-offs, name changes and corporate actions, I organized the 2017 and 2016 vintages and present them below. At first glance, it looks like the S&P 500 additions appear fairly random in their post-addition performance. While AMD & FTI are hurting the current class of 2017, IDXX has been a surprise to the upside. The average stock has underperformed the index since addition by -268 basis points while 5 stocks have outperformed and 7 have underperformed.

Class of 2017…

Looking at the class of 2016, there have been more outperformers from the date of addition until today (15 versus 11) but the average underperformance is nearly similar at -246 basis points.

Class of 2016…

So while I expected the recency bias of the AMD earnings event to skew current thoughts of the major index buying patterns, after looking at the numbers, maybe there is a reason to do more work on this. While the number of positive to negative adds looks like a random event, the slight underperformance in both 2016 and 2017 makes me more interested in future post-addition performance. Someone might even be able to find more interesting post-addition time frames to study than the one that I used above. You can access the raw data here to work with, but just be certain to scrub for corporate actions, name changes and spin-offs. And if you find something else interesting in the data, let me know.